Toronto Atmospheric Fund (TAF) - Capital Reserves

The Strategic Policies and Priorities Committee recommends the adoption of the recommendations of the Budget Committee embodied in the following transmittal letter (September 16, 1998) from the City Clerk:

Recommendations:

The Budget Committee on September 15, 1998 recommended to the Strategic Policies and Priorities Committee, and Council, that:

(1)the joint report (August 28, 1998) from the Chief Administrative Officer and the Chief Financial Officer and Treasurer be received for information;

(2)the Toronto Atmospheric Fund (TAF) review its granting policies and criteria with a view to:

(i)increasing support for city-initiated projects; and

(ii)ensuring that funding for communities are distributed across the new city;

(3)TAF seek ways to reduce administrative costs so it is in line with other charitable foundations, organizations and endowment funds and report back to the Works and Utilities Committee;

(4)TAF provide an annual report to Council on its spending, through the Works and Utilities Committee, containing a detailed summary of all expenditures of its members and administration;

(5)TAF confirm its mandate to help the City meet its goal of reducing greenhouse gas emissions - the major cause of global warming;

(6)a process be established so that TAF's expenditures for the coming year be subject to the same scrutiny as other departments, agencies, boards and commissions, for which the Corporation is responsible; and

(7)TAF attempt to document and quantify the economic and health benefits (and/or costs) which flow from energy efficiency and other TAF initiatives and include these in further analyses reports to Council.

Background:

The Budget Committee on September 15, 1998, had before it a joint report (August 28, 1998) from the Chief Administrative Officer and the Chief Financial Officer and Treasurer and the following communications:

(a)(July 27, 1998) from The Shaw House Board of Directors;

(b)(July 16, 1998) from Ms. Silvia Langer, Program Coordinator, Greenest City, forwarding a historical pamphlet entitled "The Smoke Evil, White Paper No. 309, Bureau of Municipal Research, Toronto, February 28, 1946";

(c)(April 17, 1998) from Ms. Margaret Chiu, Convenor, Environmental Sub-Committee, Toronto Chinese Health Education Committee;

(d)(April 23, 1998) from Mr. Peter K. Stokoe;

(e)(April 24, 1998) from Ms. Kathleen Cowan, Principal, Bowmore Public School;

(f)(April 24, 1998) from Mr. Paul Cryne, Rose Technology Group Limited;

(g)(April 24, 1998) from Ms. Clara M. Suter and Ms. Nadia Lypowecky, Teachers, Eastdale Collegiate;

(h)(April 27, 1998) from Mr. Jack Gibbons, Canadian Institute for Environmental Law and Policy;

(i)(April 27, 1998) from Jacky Kennedy;

(j)(April 27, 1998) from L.J. Rooney, Executive Director, Phoenix Community Works Foundation, and Janet McKay, Project Manager, Local Enhancement and Appreciation of Forests (LEAF);

(k)(April 27, 1998) from Mr. Jake Brooks, Executive Director. The Independent Power Producers' Society of Ontario (IPPSO);

(l)(April 27, 1998) from Mr. Tom Clement, Executive Director, Co-operative Housing Federation of Toronto Inc.;

(m)(April 27, 1998) from Ms. Louise Comeau, Sierra Club of Canada;

(n)(April 27, 1998) from Mr. Maurice F. Strong, Chairman, Earth Council;

(o)(April 28, 1998) from Ms. Eleanor Dudar, Environmental Education Officer, Toronto District School Board;

(p)(April 28, 1998) from Mr. William L. Holt;

(q)(April 28, 1998) from Dezso J. Horvath, Dean, Schulich School of Business, York University;

(r)(April 28, 1998) Ms. Pam Mazza, Co-chair, Island School Design Committee;

(s)(April 29, 1998) from Mr. H. Harrison McCain, McCain Foods Limited;

(t)(April 29, 1998) from Mr. Peter Victor, Dean, Faculty of Environmental Studies;

(u)(May 5, 1998) from Mr. William A. Farlinger, Ontario Hydro;

(v)(September 11. 1998) from H.G. McAdie, Ph.D., C.Chem., H.G. McAdie Associates;

(w)(September 11, 1998) from Dr. Jim Salmon, President, Canadian Wind Energy Association,;

(x)(September 11, 1998) from Mr. Steven W. Peck, Friends of the Don - East;

(y)(September 12, 1998) from Mr. Michael Harrison, President, Citizens Concerned About the Future of the Etobicoke Waterfront (CCFEW);

(z)(September 14, 1998) from Jacky Kennedy;

(aa)(September 14, 1998) from Councillor Elizabeth Brown, Rexdale-Thistletown, Ward 5;

(bb)(September 10, 1998) from Mr. Joe Berta; and

(cc)(September 14, 1998) from Mr. Alex Speigel, President, Orenda Development Consultants Inc.

Copies of the above communications are on file in the Clerk's Department.

The following persons appeared before the Budget Committee in connection with the foregoing matter:

-Ms. Silvia Langer, on behalf of Carol-Ann Coulter, Greenest City Program;

-Mr. Paul Bubelis,

-Mr. John Wellner, Toronto Environmental Alliance;

-Mr. Jack Gibbons, Canadian Institute for Environmental Law and Policy;

-Mr. Chris Winter, Ontario Centre for Sustainability;

-Mr. Steven Hall;

-Ms. Jenna Scott, Local Enhancement and Appreciation of Forests;

-Mr. Fraser Wilson;

-Mr. Peter D'Angelo;

-Dr. Jim Salmon, President, Canadian Wind Energy Association;

-Mr. Ian Morton, Pollution Probe;

-Ms. Miriam Hawkins, The Energy Action Council of Toronto;

-Mr. Tom Clement, Co-operative Housing Federation of Toronto;

-Ms. Donna Charbonneau, Rainbow Circle Co-operative;

-Ms. Shirley Thompson, Board, TAF Office;

-Ms. Eleanor Dudar, Environmental Education Officer, Toronto District School Board;

-Mr. Peter Duckworth Pilkington, Community Bicycle Network;

-Mr. Martin Liefhebber, ICLEI;

-Mr. Jeb Brugman;

-Dr. Quentin Chiotti, Environment Canada, and submitted a brief in regard thereto; and

-Councillor Jack Layton, Don River.

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(Joint Report dated August 28, 1998 addressed to the

Budget Committee from the

Chief Administrative Officer and the Chief Financial Officer and Treasurer)

Purpose:

To review options requested to increase the City's accessibility to the capital reserves of Toronto Atmospheric Fund (TAF, the Fund).

Funding Sources, Financial Implications and Impact Statement:

If the Fund is dissolved, total retained equity ($25.1 million at year end 1997) would become available to the City. In 1999, the City's budget could be reduced by $1.6 million due to the elimination of the provision for repayment of debt to the TAF, offset by an amount to provide for the TAF's continued operating activities, currently about $1.0 million for a net $600,000 saving. The use of TAF's capital reserves to reduce future borrowing needs could provide relief to the operating budget over the term of the avoided debt in the amount of $500,000 in 1999, increasing to $2.7 million in 2000.

Recommendation:

Receive as information and review in the context of the 1999-2003 capital budget to be considered this fall.

Background:

On April 20, the Budget Committee received a report entitled Toronto Atmospheric Fund, which described the operation of the fund, and presented options to provide the City with access to the Fund's equity capital. It was directed that the matter be considered after the budget process was completed.

Discussion:

As presented to the Budget Committee in April, 1998, the options for accessing the equity capita of the TAF range from using the Fund as a source of capital financing (borrowing), and dissolving the Fund so that its capital reserves revert to the City. Since that time, the TAF has continued to work with the City to identify financing opportunities consistent with the TAF's mandate, such as energy efficiency upgrades to Toronto City Hall.

Financial Considerations:

The 1998 operating budget for the TAF is approximately $1.0 million consisting of $650,000 in grants, $180,000 for special projects, and $150,000 in administration costs. In the future the TAF's budget could vary to adjust for fiscal constraints or new initiatives. For example, the 1998 budget was adjusted to account for the cancelled interest payment to the TAF from the City ($728,000). In January, 1998, the TAF Board of Directors voted to expand the granting budget to cover citizen projects in the new City of Toronto. To date, TAF has recruited and received applications for funding projects in East York, York, North York, Etobicoke and Scarborough, as well as the former City of Toronto (see attachment for listing of approved grants since 1993).

The TAF is able to attain its objectives with no impact on the City's operating budget because of revenues generated from the TAF's invested capital reserves. At a 5 per cent real rate of return, the TAF's equity capital ($25 million at year end 1997) is capable of supporting annual operating expenditures of about $1.25 million. The TAF also achieves its goals by lending its capital reserves to projects or organizations capable of supporting its mandate to improve air quality. The primary example is an existing loan to the City of Toronto with an outstanding principal of $7 million. (As long as the reserves generate a reasonable return, and the TAF's annual expenditures are consistent with the City's priorities, over the long term the City is no better off controlling the reserves directly).

Context:

The City currently has a high demand for capital relative to historical needs, and limited recourse to additional operating revenues to support these requirements. The City has also consolidated its grant envelope and administration through the Grants Review Committee. This report does not review the governance options for distributing grants given by TAF. Rather, it focusses only on the financial aspects of accessing the capital reserves of TAF that originated from partial proceeds from the sale of the former Toronto's lands. To add flexibility to the City's capital financing pressures, the City could consider collapsing the TAF to access the reserves for City purposes, or borrowing from the TAF. TAF's accumulated investment earnings can revert to the City at any time via a Council motion to dissolve the Fund.

Option 1 - Dissolving the Fund: Maintain $1 million in grants:

The legislation setting up the TAF permits the City to dissolve the Fund upon a majority vote of Council. To do so would have three potential impacts on the operating budget. First, the operating expenses of the TAF (approx. $1 million) would have to be considered for funding from the City's operating budget. Second, the budget for servicing the City's debt to the TAF (currently $1.6 million) would be eliminated. Third, the TAF's reserves (after netting out the City's remaining indebtedness to the Fund) could be applied to reduce borrowing needs, lowering debt servicing costs (assuming 10 year debt, by $500,000 in the first year and by about $2.2 million more for the next 9 years to a total $2.7 million). This latter option would only be undertaken if it is determined that avoiding incremental debt is a higher priority than retaining the reserves to offset future actuarial liabilities. The following graph illustrates the relative budget impact of each of the potential impacts of dissolving the TAF. If implemented in 1999 (year 1 on the graph), the net impact compared to the City's 1998 budget would be a reduction of about $600,000 from the collapse of the TAF, and another $500,000 potential savings from reduced debt service costs by using the TAF reserves to finance new capital

In this option, grants in the amount of $1 million could be administered by the City's Grant Review Committee directly or be transferred to TAF for distribution similar to the grant envelope to the Toronto Arts Council. If this option were considered, a further report on the governance issue should be prepared.

Option 2 - Borrowing from the Fund and/or Applying for Operating Grants:

Rather than dissolving the Fund, the City could request to borrow from it for eligible projects. Borrowing from the TAF is reported in the City's accounts the same as borrowing from conventional sources, but in reality is not dissimilar to borrowing from the City's own reserves.

Another similar option would be to apply for funding under the TAF's grant program. In this way the TAF is kept intact, and proposed City projects are scrutinized and compared with external initiatives for funding eligibility. It is expected that there are many qualifying projects from the City that can be financed through TAF that would otherwise not be a priority for City financing directly. The issue with this approach revolves around the fact that these types of projects would receive preferred funding over other perhaps more critical projects not related to the aims of TAF ie road maintenance, TTC state of good repair.

Option 3 - Partial Approach:

Council may wish to consider partial implementation of the two options above. For example, rather than completely dissolving the Fund, it might be deemed that a portion of the equity reserves revert to the City at this time ie the forgiveness of the remaining $7 million in outstanding debt principal owed to the TAF by the City which would reduce the City's operating costs by $1.6 million in 1999 but also reduce TAF's granting ability. However, reneging on existing debt may not be a compatible strategy with seeking to borrow additional funds from the TAF. Also, any reduction in the value of the TAF's reserves reduces its ability to fund its current operations. A reassessment of the appropriate level of TAF operating expenditures would be necessary prior to a decision to reduce the value of the Fund's capital reserves.

Governance Issues:

In order to set up the TAF, special legislation was requested by the former City of Toronto and enacted by the Province of Ontario. The fund operates similarly to a standard reserve fund, such that it is dedicated to a specific purpose, and interest returns accrue to the fund. However, by setting up an arms length corporation (with the Board controlled by the City), the TAF achieves a certain independence to carry out its objectives without intervention from the City. Its annual budget is also set independently, subject to the applicable legislation and the TAF's own operating guidelines. Nevertheless, in recent years the City has been able to access the Fund's accumulated surplus by cancelling interest payments on monies borrowed by the City from the TAF.

Continuing to cancel interest payments in future will result in reduced operating budgets for the Fund.

Aside from increased independence, the TAF differs from a reserve fund in that the funds are expected to be invested in projects or corporations furthering the TAF's goals, rather than standard municipal investment vehicles. However, if the fund is collapsed, the opportunity to do so could be lost.

Other Considerations:

As a model for funding greenhouse gas reduction projects, the TAF has drawn serious national and international attention. A proposal to establish a National Atmospheric Fund based on the Toronto model is currently under discussion by officials of the Federal Department of Finance. The proposal, supported by the Federation of Canadian Municipalities, would establish a national atmospheric fund that would grant and loan money to cities and towns in Canada to pursue greenhouse gas reduction projects, including capturing methane from municipal landfill sites, building energy efficiency retrofits and educational projects. The National Atmospheric Fund was recently endorsed by the House of Commons Standing Committee on Environment and Development and the Order of Canada's National Climate Change Forum.

TAF is currently in discussion with the federal department of Environment to co-sponsor public education projects that reduce greenhouse gas and smog-causing emissions in the City of Toronto. TAF is urging the Federal Minister to make a financial contribution to the Fund's granting budget for these projects.

Conclusions:

This report reviews the impact of several options with respect to the City's relationship with the Toronto Atmospheric Fund.

Liquidation of the TAF would result in its capital assets being transferred to the City. Debt repayment obligations in the City's budget at $1.6 million would be eliminated, offset by new responsibility for funding the TAF operating budget of about $1 million annually. An additional opportunity exists to offset future debt service costs by using the TAF reserves to finance new capital, yielding another $2.7 million in temporary (10 year) budget relief (but only $500,000 in the first year).

The second option is to consider means for the City to access capital within the Fund's mandate, such as eligible borrowing and grant opportunities. The City and the TAF are currently reviewing a variety of opportunities for the Fund to invest in City projects, such as energy efficiency improvements to Toronto City Hall. Such borrowing would be reported in the same way as conventional borrowing, but the Fund's interest revenues on the debt would ultimately be controlled by City Council.

The TAF does offer some unique opportunities for the City which must be considered. First, the arms length arrangement provides some independence that is helpful in attaining long term goals in the face of short fiscal pressures on the City. Second, in order to further its air quality objectives the Fund is allowed, under special legislation, investment opportunities not provided to the City. Third, the Fund is attracting national attention which is good for the reputation of the City, and may lead to additional air quality investments in Toronto by the federal government.

Contact Name:

Rob Hatton, Finance, Budget Division, 392-9149.